Good morning. Welcome to PROREIT fiscal year 2022 and fourth quarter results conference call. At this time, all lines have been placed on mute to prevent background noise. Management will make a short presentation, which will be followed by a question-and-answer period open exclusively to financial analysts. In order to ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. For convenience, the press release along with the fiscal and fourth quarter financial statements and management's discussion and analysis are available at proreit.com in the investor section and on SEDAR. Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements on IFRS measures.
PROREIT's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements, or other future events or developments. Forward-looking statements are based on information currently available to management on estimates and assumptions made based on factors that management believes are appropriate and reasonable in these circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, level of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by forward-looking statements. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.
Additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A dated March 22, 2023, available at www.sedar.com. Forward-looking statements represent management's expectations as of March 22, 2023. Except as may be required by law, PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. Discussion today will include non-IFRS financial measures. These non-IFRS measures should be considered in addition to and not as a substitute for or an isolation from the REIT's IFRS results. Description on these non-IFRS financial measures, please see the 2022 fiscal and fourth quarter earnings result in MD&A. Reconciliation of non-IFRS to IFRS results, as applicable, may be found in the earnings release in MD&A for the 2022 fiscal year and fourth quarter.
Please refer to the non-IFRS measures section in the MD&A for the fiscal and fourth quarter for additional information. I will now turn the call over to Mr. James Beckerleg, President and Chief Executive Officer.
Thank you very much, Michelle. Good morning, everybody. Welcome to this call. Joining me for the management presentation today is Gordon Lawlor, in his capacity as Executive Vice President and Chief Financial Officer, and Alison Schafer, our Senior Vice President of Finance. Just before I get into our year-end numbers, I'll note for everybody that this March, PROREIT is celebrating its 10th anniversary, and that's a period that we're very proud of, and we will be taking one or two minutes to congratulate ourselves. This call also represents my last analyst call as most of you know, I'll be stepping down from the CEO position to take a non-executive role on the board of trustees as of April the 1st. After a very successful transition year, which we'll speak to, Gordon will take the helm.
2022 industrial same-property compared to the same period last year. At December 31st, 2022, the weighted average in-place rent on our industrial portfolio was CAD 7.78 per square feet, an increase of 5.3% compared to the same date last year. Our retail sector, mainly comprised of necessity-based properties, continued to perform well with a 2.7% increase in same-property NOI for the year. Our office segment, which now comprises just 13.3% of our total same-property NOI for the year, reported a decrease in occupancy in two of our eight buildings. On the leasing front, we continue to be very successful in our renewal activities. We renewed 93.2% of our leases maturing in 2022 at a positive average spread of 16.4%.
As well, a very positive 49.8% of leases maturing in 2023 have been renewed at an average spread of 36.7%. Our successful leasing spreads have not yet fully impacted our financial results, but as I mentioned earlier, we will see the benefits over the coming quarters. Rental rates are continuing their upward trend in the robust Halifax, Southwestern Ontario, and Ottawa markets where we have a strong presence. In the year, we also updated independent external appraisals for 44 properties, contributing to the fair market value gain over the year of CAD 52.5 million. Let me now briefly go over some financial metrics for 2022. Our solid growth across key indicators was mainly driven by the net acquisition activity in the last 12 months.
We ended the quarter with 130 properties in our portfolio, including the 50% ownership interest in 42 properties, compared to 120 properties owned at 100% at the same time last year. At the end of 2022, we owned approximately 6.5 million sq ft, but in total, managed approximately 8 million sq ft. Total assets amounted to CAD 1.04 billion at the end of the year, up 4.6% year-over-year. Property revenue grew CAD 97.2 million, a 25.2% increase compared to 2021. Net operating income reached CAD 57.7 million, up 24.8% year-over-year. AFFO grew to CAD 31.3 million, up 24.8% year-over-year.
Our basic AFFO payout ratio stood at 86.9% compared to 87.7% a year ago. At CAD 8.21 per unit at December 31, 2022, I'm pleased to highlight that our NAV per unit continues the upward trend, increasing CAD 0.94 per unit since 2021 and CAD 1.90 per unit since 2020. We also strengthened our balance sheet during the year, reducing our gross debt by CAD 10 million. As Jim mentioned, we also reduced our debt to gross book value ratio to 49.7% at year-end, compared to 53.1% at the end of 2021. A trend we intend to continue to pursue over the coming years.
This year, the joint venture with Crestpoint, the sale of our non-core properties, and our successful leasing spreads were the greatest contributors to our debt reduction. Our debt maturities are quite modest, with CAD 52 million of mortgages coming due in 2023, and only CAD 26 million coming due in 2024, allowing us to be disciplined in managing our balance sheet. In 2022, we published our inaugural ESG report, and our sustainability steering committee has been working diligently to prepare the follow-up. We continue on our ESG journey and an increase in tracking efforts to better understand where and how we can improve our efforts to reduce our carbon footprint and strengthen our social impact. We are excited to be able to report on our progress this spring. I'll now turn the call over to Alison to discuss Q4 financial results.
Thank you, Gordon. We recorded a solid financial performance in the fourth quarter. Property revenue amounted to CAD 25.1 million, a 9.3% increase compared to the same period in 2021. Net operating income was CAD 14.6 million, up 9.1% year-over-year. These increases were mainly driven by the impact of the net acquisition activity over the last 12-month period. AFFO totaled CAD 7.7 million, a 4.5% increase compared to Q4 last year. The growth was largely related to the net increase in the number of properties acquired in fiscal year 2022, combined with the increase in property management fees resulting from our joint venture transaction as sole property manager of the entire 50% owned portfolio.
I am pleased to highlight our FFO and AFFO unit performance in the quarter, coming in slightly above 2021. We achieved this while also reducing our debt to gross book value by 3.3%. Our basic AFFO payout ratio stood at 88.5%, an improvement compared to 91.5% from the prior year period. Our overall same-property portfolio represented 92 properties out of our 130 property portfolio. Industrial same-property NOI was up a robust 5.0% in Q4. However, our overall same-property NOI remained relatively flat in the quarter as a result of increased vacancy in two out of our eight office properties. Our liquidity position remained healthy, with CAD 23 million available under our credit facility at the end of the year.
Our weighted average cap rate for the portfolio was approximately 5.8% at the end of the year, or CAD 155.89 per sq ft, down from 5.9% at the end of 2021. We saw some cap rate expansion in a few areas of our office portfolio. For almost all of our discounted cash flow models, we have increased discount and terminal rates to reflect the interest rate risk in the market. In general, valuations are holding due to increased cash flows in our models. Distributions of CAD 3.75 per unit were declared monthly throughout the fourth quarter of 2022. I will now turn the call back to Gordon for closing remarks.
Thanks, Alison. In the context of the heightened macroeconomic uncertainty, market volatility and high interest rates, we believe we are well-positioned and view this as a time of opportunity to focus on operational efficiency. We have lower leverage to perform sustainably. Optimizing our portfolio by increasing our concentration on high-performing assets in the industrial sector while disposing of smaller non-strategic properties and reducing debt remains our primary focus. Increasing our industrial cash flow as a percentage of the total portfolio is key as we set out our next target to reach 80% in the near term from our current 69% at year-end. This strategy has proven successful, as evidenced by our strong results. We are confident it will continue to generate stable cash flow as we progress towards our goal of CAD 2 billion in assets in the near term.
We remain steadfast on our commitment to create sustainable value for all stakeholders. I would like to conclude by thanking my longtime partner and friend, Jim. It has been a privilege and an honor working side by side with him over the past decade and to build PROREIT into what it is today. I look forward to benefiting from your contributed guidance and expertise as a member of the board. Thank you, Jim.
Are we ready for questions?
We are.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. First question comes from Fred Blondeau of Laurentian Bank. Please go ahead.
Thanks. Good morning. Gordon, just on the CAD 65 million of debt maturities, or I guess if I understood well, I guess around CAD 55 million- CAD 56 million remaining this year. I was wondering what's the timing of those and how are the discussions progressing so far?
We have about CAD 17 million coming due in June. We've already got a term sheet signed on that with some good margin terms. And it's the final rate obviously depends on when we get the committed financing and fixed rate. That one performed well. That was part of our Winnipeg Industrial. We've got a couple of small million-dollar-ish assets during the year, and the next piece is about CAD 30 million maturing at the end of December. We haven't really worked on that yet.
Okay. I see. Is it too early to give us a bit of indication on rates that you're seeing today?
Yeah, it's probably too early. We have an attractive spread in that, you know, depending on the term, we have options between three and 10 years. The margins on that based on bonds would be between 200 and 215 basis points. As you know, it's the basis point spread on the curve has moved 50 to 60 basis points weekly. I can't really comment on an all-in price right now.
No, that's fair. Then in the press release, you mentioned capital recycling. I was wondering if you could possibly quantify expected dispositions for this year and I guess the expected net impact on the debt ratio?
I mean, we've got about, give or take the same as last year, CAD 30 million circled in some assets that we would sell if the pricing was right and the market was there. Can't really comment on that right now as to what the debt level would be with that, but we would use the net proceeds of any of that for debt repayment.
Okay. Do you have like a debt ratio target for 2023?
Just we have a three-year target to move below 50%, but we haven't quantified it on an annual basis or anything like that.
Okay. That's great. Thank you.
Thank you.
Thank you. The next question comes from Brad Sturges of Raymond James. Please go ahead.
Hi there. just on the asset field there, the CAD 30 million that you've circled, is that predominantly retail assets?
Retail and potentially some office, but those are just assets that we've circled at this time.
Okay. No-nothing's on the market right now?
On the market, it's a difficult discussion. There's assets... We get calls all the time about certain of our assets. It just depends on the calls and what's going on in the market. Nothing, you won't see any flyers or anything of such, I don't think, in your inbox, put it that way.
Fair enough. Just on the leasing side of things, obviously you've made good progress on your 23 expiries. Just in terms of what's left to do or what's remaining, what would you be expecting for your leasing spreads given I think it's mainly industrial leases that are rolling this year?
Yeah, I mean, there's a couple of chunky ones and then a bunch of small assets which, you know, is only with Crestpoint. What we've been seeing is, you know, as you see on the numbers here, 30%-40% leasing spreads in those numbers. I think we'd expect that largely to continue.
Okay. A similar type of retention rate then I guess with your tenants. I think you were 90% last year. Is that kind of what you're expecting for 2023?
Yeah, I mean, that's our target. I think for the past six or seven years, we've achieved in excess of 90%, leasing and releasing. I wouldn't expect we'd end up much different this year.
Okay. That's great.
No increase in vacancy in the industrial sector.
Yeah, we don't see any increase in vacancy during the year or anything like that where we are right now, nothing significant.
Nothing abnormal for like transitional vacancy that a larger lease might have some downtime.
We have a 100,000 sq ft building in Montreal out by the airport. That Committed vacancy will stay the same, but we'll have about six months downtime where three tenants leave to replace with new tenants on a 10-year lease, and rents going from CAD 10 to CAD 15.50, CAD 15.75 over. Basically Q2 and Q3, that property will be down on an NOI basis, it'll be fully leased and back up September.
Okay. That's helpful. I'll turn it back.
Thanks.
Thank you. The next question comes from Mark Rothschild of Canaccord Genuity. Please go ahead.
Thanks. Good morning. Let me just start. Congrats Jim and Gordon on all of this. It's been a pleasure and look forward to continue working with you guys and following the company. As far as the asset sales, and you sort of touched on this already, you've done some good leasing on the office side. Do you see potential for much more this year? Does that play into your thoughts on timing of potentially selling some of those assets as you increase your focus on industrial?
It's Gordon. The challenge is if we're all following the markets is really the debt. You know, we have office assets that we're asked about all the time. We have solid retail assets with long-term tenancies out west that, you know, west hasn't been our focus for a while. Those are the assets that we kind of got circled. The actual potential for sale is really driven by the debt market. When you have, you know, the bond rates jump 50 to 70 basis points in a two or three-week period when it takes, you know, two to three months for somebody to negotiate diligence and then close on a property, that's really what's suspect in the market right now. It's not really the zest for real estate, especially if it's well-performing.
That's really the driver of whether, you know, asset sales can happen this year or not. We have to have some reduced volatility in the debt market. That's my opinion anyway.
Okay, great. Thanks. That's all for me.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star one at this time. The next question comes from Sam Damiani of TD Cowen. Please go ahead.
Thanks, good morning, everyone, and congrats on a, on a great, finish to the year. Maybe Gordon, just on that, comment you made about that building in Montreal near the airport, is the replacement lease, firm signed up, or is that still in negotiation? What's the status of that?
We've got two binding office lease. One of them we have the full lease done, but two binding office lease on that building. Give or take 100,000 sq ft, it's been 90% occupied since we bought it in 2014. After this transaction, it'll be 100% occupied starting September 1st for both of the properties. If you take-
Major tenants.
Sorry?
Major tenants.
Yeah, major tenants, you know, with good covenants and everything you'd expect in basically a Class A flex industrial building. It's 3,200 net property if you wanted to check on it. If you're for your modeling purposes, give or take CAD 900,000 a year in NOI. We'll be down two quarters on that. That number will make its way up to CAD 1.5 million annualized starting Q4.
Makes sense. That's perfect. great to see. Just on the credit facility, you tapped into a little bit more. I know you've got some mortgages coming up this year. Is the expectation to up finance those secured assets? Just well, I guess, what's the strategy on liquidity over the course of 2023?
Yeah. We're looking at, you know, some other liquidity options at this time, but upward financing a bit and then the sale of any assets as well, we're looking at. It's all, it's all fluid right now. You know, if we sat here, the end of December, we thought that the equity markets might be open by June, but that clearly doesn't look to be the case right now. Yes, we're working on those things. We've got some opportunities there that we're looking at. You know, but we should be in good shape with it by the end of the year.
Okay, great. Just on the outlook for 2023, same-property NOI, I mean, what should we expect? Will the pool of same-property assets get meaningfully bigger this year as a percentage of the total portfolio? I know you've got this one lease, with some downtime, but are you willing to put out a number that you're expecting on same-property for the year?
Hi, it's Alison here. I think, you know, a fair estimate would be somewhere in the, you know, 3%-5% on the same property. I think our industrial will definitely be our leader in that.
Yep.
In that three property asset class. You know, office might be the last one trailing in there.
On our office portfolio, we will be stabilized. I mean, we've got committed occupancy 92%. Some of that real occupancy you won't see till the end of Q3. You know, if we were talked about the bottom of the office same store, I think we've reached that and we're on the other side of that.
Okay. Just, just final one, I guess you certainly reiterated the CAD 2 billion goal in terms of total assets. Focus for the, for the short term, for the you know, given the volatility is obviously on capital recycling and chipping away at the leverage. Just I guess, how would you say your CAD 2 billion goal has changed in the last three months?
I don't think it's changed. I think the goal is dependent on the markets to some extent. Recycling one will help. As you know, CAD 2 billion is CAD 1 billion more than we have now. Really the challenge is just a timing thing from that standpoint, right? I mean, that's a target that we have. We didn't do any acquisitions in 2020 with COVID, and then we bought CAD 300 million, you know, in 2021, integrated it all easily and moved along. It'll be, I could say, I guess the steps might be lumpy just because of where the market is.
Yeah. Okay. Just sorry. Thank you for the additional disclosure in the MD&A. That was very helpful, and I'll turn it back. Thank you.
Thank Alison for that. She's been very diligent at increasing our disclosures. Thank you, Alison.
Thank you, Alison.
You're welcome. It was my pleasure.
Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
Thank you all.
Thank you.
Thank you.